The employee retention tax credit is now available for employers who previously received, or will receive, a Paycheck Protection Program loan. This change in the law provides significant benefits to employers who have been negatively impacted in 2020 and 2021 due to the economic downturn related to Covid-19. We have detailed the specifics below. Feel free to contact your TBC advisor to discuss your situation and eligibility.
Employee Retention Tax Credit:
The employee retention credit was established in March of 2020 by the CARES Act, and subsequently extended and modified by the Economic Aid Act in December of 2020. The Economic Aid Act allows employers who received a loan under the payroll protection program to be eligible to claim the employee retention credit in both the 2020 and 2021 tax years. However, an employer cannot receive both the credit, and loan forgiveness on the same wage dollars. Likewise, an employer cannot claim both the Employee Retention Credit and other credits on the same wage dollars.
The Employee Retention Credit for 2020:
In 2020, the employee retention credit is a refundable credit of 50% on up to $10,000 of qualified wages and certain healthcare costs paid to each employee between March 13, 2020 and December 31, 2020. Employers can qualify for this credit one of two ways: by a full or partial suspension of business by government mandate, or by experiencing a significant decline in gross receipts. If you qualify for the credit by way of a shutdown, you will only be able to take the credit on wages paid to employees during the shutdown period. To qualify by way of a decline in gross receipts, a calculation is done on a quarter by quarter basis during 2020 to determine eligibility. The initial decline in gross receipts must be 50% or more in a quarter, when compared to the same quarter in 2019, and then each subsequent quarter the decline in gross receipts must be 20% or more than the same quarter in 2019 to continue to qualify. For example, to qualify in the second quarter of 2020, gross receipts must be 50% or less than the gross receipts of the second quarter of 2019. Then, to continue qualifying for the third and fourth quarters, the total gross receipts in the third quarter of 2020 must be 80% or less than the total gross receipts of the third quarter of 2019 (or stated in the alternative the decline in receipts must be 20% or more of the 2019 receipts). If a quarter exceeds the 80% threshold, it will be the final qualifying quarter for 2020. For employers who averaged more than 100 employees during 2019, qualified wages and health care costs are restricted to wages paid to employees who weren’t providing services, and are limited to the amount the employee would’ve received for working an equivalent duration during the 30 days immediately preceding the period of hardship (up to a max of $10,000 per employee for all of 2020).
The Employee Retention Credit for 2021:
The Economic Aid Act extended the Employee Retention Credit to June 30, 2021 and broadened both the credit amount and qualifications to claim the credit. For the first and second quarters of 2021, the credit is 70% of up to $10,000 per employee, per quarter of qualifying wages and health care costs. To qualify, employers must be fully or partially suspended due to government mandate, or experience a 20% or greater decline in gross receipts per quarter in 2021 (as compared to the same quarter in 2019). If you qualify due to a suspension of business, the credit is still only available for the time period of suspension. Employers who averaged more than 500 employees in 2019 can only take the credit on wages & certain health care costs paid to employees who weren’t providing services.
How to Claim the Credit:
The credit is claimed on your quarterly payroll tax filings, and is refundable if the credit exceeds the amount of payroll taxes you have remitted. If you determine retroactively that you were eligible for the credit in 2020, the fourth quarter payroll filing can be amended to claim the credit for all eligible quarters of 2020. Going forward, certain qualifying employers can request an advance of the credit, or retain a corresponding amount of the employment taxes that would’ve otherwise been remitted.